Microsoft and Yahoo strike Web search partnership

By Alexei Oreskovic and Bill Rigby

SAN FRANCISCO/SEATTLE (Reuters) - Microsoft Corp and Yahoo Inc inked a 10-year Web search deal to challenge market leader Google Inc but stopped short of combining their display advertising businesses.

The long-expected deal effectively means Microsoft's new Bing search engine will be combined with Yahoo's experience attracting advertisers to pose the first serious threat to Google, if the companies get regulatory approval and can make the partnership work.

Yahoo shares fell 11 percent as some investors were disappointed by the limited scope of the deal, which did not include upfront payments for Yahoo, which could have been $1.5 billion or more, according to a Sanford Bernstein research report last week.

"Microsoft will be able to report a greater share in terms of search... And Yahoo doesn't have to spend any more money on search," said Barry Diller, chief executive of IAC/InterActiveCorp, which owns rival search engine Ask.com.

Shares of Microsoft were flat, while Google shares fell 1.2 percent.

Microsoft and Yahoo still face antitrust and privacy issues and likely opposition from Google, which dropped its plans for an advertising partnership with Yahoo last year under pressure from the U.S. Justice Department.

The companies said they expect the deal to be "closely reviewed" by regulators, but were "hopeful" it can close in early 2010.

Google said on Wednesday only that it was "interested" in the Microsoft/Yahoo partnership, while the chairman of the U.S. Senate antitrust panel said the deal warrants "careful scrutiny."